Audit Proof Your Business: Avoid These IRS Triggers!

So these are some of the common kind of audit triggers. Things that can trigger an audit to say, hey, does the IRS want to examine and look at your tax return? The tax system is broken. And this is why. This is a visual representation of the taxpayer roadmap produced by the IRS. And I like to say it's the IRS's system of confusion. Their system is designed to, you know, it feels like the IRS is sending out letters and they just pick a random number and it's like the shock and awe. They're trying to overwhelm us as business owners. The struggle is busy business owners. They lack the time, energy, desire, live in that state of overwhelm already. The reality is this, busy business owners think, oh, my CPA has me covered. They're like, oh, my guy, my gal, they're awesome. They're going to help me out. They've got me covered. When in reality, most CPAs don't. Here's why most CPAs, I say no disrespect to them, it's a busy time of year that they do their work. But most are what I would call happy historians. Right. But the right numbers in the right boxes, but not much in the way of being proactive happens. The result at tax time feels like you've got a total knockout by the irs. And most people, they try Google, they ask their friends, they're like, hey, I'm trying to find how can I save money on taxes? Or asking their CPA and not getting much in the way of response other than, oh, you made lots of money, so you get to pay taxes. That's a good problem. And so developed a system to help people fight back legitimately without the fear of audit or jail time. And that system is something that we call the clear edge framework. Yep. At the end of the day, you know, these are the pillars, pillars of tax planning. I'm very proud of what we put together here because this is a system by which we not only help people initially find that clear edge over the government and the irs, but we also help them maintain these, give us pillars that we can refer back to and say as we move out of implementation and into maintenance with our clients, say, hey, are we still executing fully in these areas or these pillars? And are there any recent developments or new things that have developed in these pillars that would impact your taxes? And now 2025 is kind of a. After an election year when there a new regime is in place, a new administration's in place, there's going to be a lot of tax changes. Happening this year. Well, how does that impact us as business owners and especially from an audit perspective? So let's dive into audit proofing your business. So setting yourself up for success. I always say the definition of integrity, right, it's doing the right thing no matter who's watching, whether anybody's watching or not. I like to say just because the government lies, che steals doesn't mean we can or should. We should be doing things the right way. And the fact of the matter is this. The IRS audits are increasing technology and automated letters. Most of the audits that happen these days are remote, or what they call a letter audit, where they send out a notice and say, hey, please explain X, Y and Z categories on your tax return. Those are what we call line item audits where they say, you know, your travel expenses look really high. There are certain things that can trigger an audit, and let's cover those. So the things that can trigger an audit are basic math errors. You know, with the advent of technology and computers and tax software processing software, these are a lot less frequent. But if your tax preparer is not completing your schedule M2, your M2 adjustments for basis, or, you know, keeping track of those things that can potentially trigger an audit. So paying attention to the math is important. As a business owner, you kind of have to. Unless you're really doing a deep, deep dive on your tax return, you do have to kind of rely on your tax preparer to do that. Large deductions. If you have substantially large deductions that can trigger an audit. When we look at tax returns for a roofing company or a construction company, we examine and say, hey, you know what, what are the things that should be in your cost of goods sold category? Right? So if you have out of town jobs or you're doing catastrophe relief and hurricanes, chasing the storm, so to speak, and you have a lot of travel expenses, you should be lumping those travel into your cost of goods sold. If it's directly tied to jobs, you should be shifting as much as you legitimately can and legitimately tie two jobs into that cost of goods sold category, because that's going to pull it out of the general administrative kind of below your gross profit line on the tax return and help you avoid having large travel deductions that the IRS could question you. Other audit triggers are if you have high income. Think of it. If you're a big fish, they're not going after the Mary Kay or, you know, my mom did Doterra oils, right? She was selling Doterra oils for A while. And she made like five, six, seven grand a year. Right. Who are they going to audit? They going to audit that person or are they going to audit somebody that is making substantially higher income? So that can trigger an audit if you have seen consistent increases in income over the years. Another area is if you have 100% vehicle use for business. Right? Or business use for vehicles. I had a guy who's a welder and he had a large truck with a lot of equipment that was attached. It was like a portable welding rig. He didn't use that take his family to the movies in his rig because he's like, yeah, I don't even go to the grocery store in this thing. I unless I have like an assistant with me or somebody with me to stay with the vehicle because he's like, I'm afraid that my equipment's going to get ripped off. There's probably $200,000 worth of equipment on that truck. You know, in that case, that's clearly a 100% business use of the vehicle. But if you're claiming large deductions around vehicles saying, Hey, 100% of my vehicle is always business unless it's a dedicated to part of a fleet or dedicated to the business, that is an area of vehicle expenses they do like to audit. And look at another is unreported income. So, you know, making sure this sounds stupid, but it's pretty the simple stuff. Did you report all of your income or did you leave something off? Another area where you know can trigger an audit is if you're reporting losses or substantial losses. That can happen if you have a bad year or some jobs that go way over budget. And you know, I've seen contractors have a tough, tough year, material costs spike or whatever that looks like. But if you're reporting substantial losses and year over year losses, that can turn into an audit where they can say, hey, are you reporting losses to offset taxes and pay less in taxes or do you legitimately have losses so that can trigger an audit? Schedule C filer. So if you're a sole proprietor, you're growing in income. This is kind of that high income, large deductions combined with Schedule C if you're a sole proprietor. I've seen contractors, roofing contractors remain a Schedule C for a very long time because they didn't want to deal with the hassle of being a corporation or filing an LLC or dealing with that. So with your higher grossing Schedule C, you're going to be lumped into the same category as they're making three Four or five grand or barely breaking even, but you're over here making, you know, million. I've seen a sole proprietor that made $10 million gross, and they were still profiling as a sole proprietor. I was like, wow, you should be a corporation. Because now if you jump into that corporation, you know, you might be grossing 10 million, but you're going to be up against trucking company that had, you know, nearly 200 million in gross revenue. You're in a 10 million gross revenue versus a 200, 300, you know, much larger companies. So again, who are they going to audit in that category? Are they going to go after you or are they going to go after a bigger fish? Probably a bigger fish. Home office deduction. So, and this isn't that you shouldn't take the home office deduction. You should just be aware that if you're taking the home office deduction as a sole proprietor with the home office deduction form, that's an area that the IRS does like to audit because the rules around that are that it has to be exclusive use. Classic example is you have a treadmill in your office and you hang laundry on it because you don't use the treadmill. You maybe used it for the first week or two, but then you slowly stop using it. So now it's your. You hang laundry on it to dry. Right. And if that treadmill's in your home office, that room, then the IRS will say, hey, you're not allowed to take that home office because that's a personal thing and it's not an exclusively business use. The IRS really likes to audit home office deduction on the business use of home form because people just don't adhere to the strict letter of the law when it comes to the rules. We covered this. The high travel and high meals costs. Right. At the end of the day, the IRS loves to audit these categories. So these are some of the common kind of of audit triggers, things that can trigger an audit to say, hey, does the IRS want to examine and look at your tax return?